Page Nine

Thursday, July 19, 2012

One of the few issues which both the political left and the right agree upon is rooting out financial corruption by the banking industry. The latest banking scandal involves big banks submittingfalsified datain order to keep their borrowing rates low. As many as 16 banks worldwide have been submitting false information to LIBOR, the London interbank offer rate. LIBOR is considered one of the most crucial interest rates in finance. It is the average interest rate the world's largest banks pay when they borrow money from each other, andaffectsthe rate of interest borrowers pay on everything from student loans to credit cards to corporate debt. It is the benchmark for three-quarters of aquadrilliondollars in financial dealings.

16 banks contribute daily estimates to LIBOR of what interest rate they would have to pay if they borrowed money. Banks borrow from each other on occasion when they find that more withdrawals have been made in a day than deposits by customers. By submitting artificially low interest rates, the banks were able to disguise their financial troubles. This heavily contributed to the subprime mortgage meltdown. Subprime mortgage lenders preferred using the LIBOR index to tie adjustable rate mortgages to due to their overly rosy picture.

The New York Fed, which was headed by TARP bailout architect and now Secretary of the Treasury Timothy Geithner,knewin 2007 that banks were rate rigging. Although Geithner offered suggestions to increase transparency, nothing was done and the rate rigging continued. Evidence of therate rigginggoes back to 2005.